« February 2019 »
SunMonTueWedThuFriSat
     
1
2
3
5
6
7
8
9
10
12
13
14
15
16
17
18
20
21
22
23
24
26
27
28
  
       
Today


IVolatility Trading Digest™


Volume 19 Issue 8
Probability Calculator [Charts]

Probability Calculator [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Please read IVolatility Trading Digest™ Disclaimer at the very bottom of this page

To add comments or to ask questions please click here (or use the blog "COMMENTS" link at the very bottom of the blog page).

The S&P 500 Index advance from the December 26 low at 2346.58 continues, but has not yet exceeded the December 3 high at 2800.18. Will it continue? The market review below offers some thoughts, followed by a brief look at our Probability Calculator.

Review NotesS&P 500 Index (SPX) 2792.67 ended the week 17.07 points or +.61% higher, all on Friday's advance of 17.79 points. While well above the 200-day Moving Average it still has three recent prior highs overhead to clear. On any pullback the 200-day Moving Average now 2747.53 will likely provide support. The Strategy section below has more details.

VIXCBOE Volatility Index® (VIX) 13.51 declined 1.40 points or -9.39% last week. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, declined .82 points or -6.88% ending at 11.10.

table

Now well below the bottom of the recent range around 14 that began last October as the S&P 500 Index turned lower shown in the one-year volatility chart and the SPX line charts above. Downtrending implied volatility always excites the bulls.

VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration. Previously, declines below 10 % and advances above 30% were unsustainable, but for the last year premiums above 10% have been scarce.

table

With 17 trading days until March expiration ,the day-weighted premium between March and April allocated 68% to March and 32% to April for a 13.92% premium vs. 9.88% week ending February 15; into the green zone between 10% to 20% associated with S&P 500 Index uptrends, adding more support for the bullish view. If there was only one indicator available, this one would be a top contender.

For daily updates, follow our end-of- day volume weighted premium version located about half-way down the home page in the Options Data Analysis section on our website.


Big Data? In options we are Big Data!
 "Options data with predictive qualities - Nobody does it better!"
 Probability Calculator Free Trial


Strategy

Review NotesOnce again, as long as the S&P 500 Index remains above the downward sloping trendline from the October 3 high and breadth continues improving, odds favor the bulls. While advancing on the upward sloping trendline from the December 26 low at 2346.58 the trendline angle at 49° seems unsustainable compared to typical longer uptrends around 30°. However, equities will likely remain well supported since few are willing to risk being short before a China trade agreement is announced when Trump and Xi meet. However, then be prepared for a "sell the news" correction now well anticipated.

Probability Calculator

The recent addition of European and Canadian market data makes a good reason to take another look at our clever Probability Calculator.

Located under Services & Tools/Analysis Services on our home page it includes a detailed Users Guide along with a video example.

This handy auxiliary tools helps determine the probability of the underlying security reaching the desired price in a selected time frame based upon either implied or historical volatility inputs. The goal is to reduce subjectivity by adding objectivity.

This SPX example starts by setting the symbol universe to All. The other selections are: USA, Europe and Canada. The last Underlying Price 2792.67 appears automatically along with the Interest Rate and Dividend Yield.

Clicking on Future Date will list all the future options expiration dates. For this example using Custom opens the previous selected date March 15 and then displays the number of days that can also be altered.

For Implied Volatility ATM Volatility of 10.63% was selected assuming the current at-the-money implied volatility for this time frame is the best estimate.

Then, the First Target Price of 2850 and Second Target Price of 2750 were entered based upon our trendline estimate that SPX will continue higher.

Selecting Calculate produces the following:

table

Based upon this it seems like a 2845/2855 long call vertical spread is about right at 24% of the distance between the strike prices. Here they are from Advanced Options using the offer price for the buy and mid price for the sell assuming some price improvement is possible.

table

Ask 7.20 -4.80 mid = 2.40 at 24% of the distance between the strike prices, about right.

The out-of-the-money strike price selected is just below the first target price increasing the odds slightly from 41.48% at 2850 and both strike prices are well within one standard deviation up or down.

Since all trade plans require a SU (stop/unwind ) it will be set at a close below the 200-day Moving Average now at 2747.53 but increasing as SPX advances.

For other strategies, such as an Iron Condor the strike prices selected to sell should be around two standard deviations up 2931.09 or down 2658.41.

Summary

As the S&P 500 Index continues higher options and futures indictors continue to improve much to the delight of the bulls. Expectations seem focused on an upcoming trade deal with China that could trigger a "sell the news" correction when announced.

Twitter Follow us on twitter for more ideas from our scanners and other developments.

Actionable Options™
We now offer daily trading ideas from our RT Options Scanner before the close in the IVolatility News section of our home page based upon active calls and puts with increasing implied volatility and volume.

"The best volatility charts in the business."

Next week will include more market review details along with a market breadth update.

Finding Previous Issues and Our Reader Response Request

PreviousIssues All previous issues of the Digest can be found by using the small calendar at the top right of the first page of any Digest Issue. Click on any underlined date to see the selected issue. Another source is the Table of Contents link found in the lower right side of the IVolatility Trading Digest section on the home page of our website.

CommentAs always, we encourage you to let us know what you think about how we are doing and what you would like to see in future issues. Send us your questions or comments, or if you would like us to look at a specific stock, ETF or futures contract, let us know at Support@IVolatility.com or use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com website. To receive the Digest by e-mail let us know at Support@IVolatility.com

 

Comments:


Permalink Comments [0]



IVolatility Trading DigestTM Disclaimer
IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter constitutes a recommendation to buy or sell any security. Before entering a position check to see how prices compare to those used in the digest, as the prices are likely to change on the next trading day. Our personnel or independent contractors may own positions and/or trade in the securities mentioned. We are not compensated in any way for publishing information about companies in the digest. Make sure to due your fundamental and technical analysis homework along with a realistic evaluation of position size before considering a commitment.

Our purpose is to offer some ideas that will help you make money using IVolatility. We will also use some other tools that are easily available with an Internet connection. Not a lot of complicated math formulas but good trade management. In addition to Volatility we use fundamental and technical analysis tools to increase the probability of success and reduce risk. We prepare a written trade plan defining why the trade is being made, what we call the "DR" (determining rationale) and the Stop/unwind, called the "SU".